The idea of a luxury tax has been floated by myriad media members as the NHL lockout has worn on. And while there’s no hard evidence that one’s about to be put on the table, a report that the NHLPA is working on a “radically different” proposal got us wondering if the league would ever consider such a system.
In its most basic form, a luxury tax allows a team to exceed the salary cap by paying a tax on the amount it exceeds said cap by. The tax that’s collected is then distributed to the needy franchises.
The NBA has a luxury tax. Starting next season, teams will have to pay $1.50 for every dollar up to $4.99 million over the threshold, $1.75 for every dollar of the next $5 million, $2.50 per dollar of the next $5 million, and $3.25 per dollar for the next $5 million.
Now, the most obvious consequence of the NHL implementing a luxury tax would be a decrease in parity. No, the big spenders don’t always win. But more often than not they do.
In the NBA, there are numerous teams with practically zero shot at winning a championship. To illustrate, Bodog lists 13 sides with odds of 100/1 or more. For the NHL, Bodog has just one team over 100/1 (Columbus, 150/1).
That’s not to say a luxury tax would turn the NHL into the NBA. One basketball star has considerably more of an impact than one hockey star, since that one basketball star can play almost the entire game (if not the entire game).
There are also benefits for leagues when the big-market teams have a competitive advantage over the small-market ones. For example, which match-up do you think would get better TV ratings – a Rangers-Red Wings final, or Lightning-Predators?
And for big-market teams, a luxury tax that allows them to gain a competitive advantage might be more palatable than simply forcing them to cut a revenue-sharing check and getting nothing for their money.
The risk, of course, is that fan interest drops for teams that can’t afford to pay luxury tax.
There’s also the more considerable risk that owners who can’t afford to pay luxury tax still end up paying luxury tax. As we all know (and the NHL freely admits), some owners have trouble controlling themselves.
For that last reason, if the NHL were to even consider a luxury tax, there would have to be stopgaps that would ensure some semblance of cost certainty.